Navy Littoral Combat Ship (LCS) Program: Background, Oversight Issues, and Options for Congress

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1 Order Code RL33741 Navy Littoral Combat Ship (LCS) Program: Background, Oversight Issues, and Options for Congress Updated November 2, 2007 Ronald O Rourke Specialist in National Defense Foreign Affairs, Defense, and Trade Division

2 Navy Littoral Combat Ship (LCS) Program: Background, Oversight Issues, and Options for Congress Summary The Littoral Combat Ship (LCS) is a small, fast surface combatant that is to be equipped with modular mission packages, including unmanned vehicles (UVs). The basic version of the LCS, without any mission packages, is referred to as the LCS sea frame. The first LCS (LCS-1) was procured in FY2005, another three (LCSs 2, 3, and 4) were procured in FY2006, and two more (LCSs 5 and 6) were procured in FY2007. The Navy s proposed FY2008 budget, submitted to Congress in February 2007, requested $910.5 million in procurement funding for three more LCSs. Navy plans call for procuring a total of 55 LCSs. In response to significant cost growth in the building of the first LCSs, the Navy in January 2007 placed a 90-day stop-work order on LCS-3 and in March 2007 announced a proposed plan for restructuring the LCS program. The plan would:! cancel the two LCSs funded in FY2007 (LCSs 5 and 6) and use the funding to pay for cost overruns on earlier LCSs;! lift the stop-work order on LCS-3 provided that the Navy reached an agreement by April 12 with the Lockheed-led industry team building LCS-3 to restructure the contract that the Lockheed team has for building LCSs 1 and 3 from a cost-plus type contract into a fixed price incentive (FPI)-type contract;! alternatively, terminate construction of LCS-3 if an agreement on a restructured contract for LCS-1 and LCS-3 could not be reached with the Lockheed team by April 12;! seek to restructure the contract for building LCSs 2 and 4 (which are being built by a second industry team led by General Dynamics) into an FPI-type contract if LCSs 2 and 4 experience cost growth comparable to that of LCSs 1 and 3 and, if such a restructuring were sought, terminate construction of LCS-4 if an agreement on a restructured contract for LCS-2 and LCS-4 could not be reached;! reduce the number of LCSs requested for FY2008 from three to two (for the same requested FY2008 procurement funding of $910.5 million), and the number to be requested for FY2009 from six to three;! conduct an operational evaluation to select a favored design for LCSs to be procured in FY2010 and beyond; and! conduct a full and open competition among bidders for the right to build that design. On April 12, 2007, the Navy announced that it had not reached an agreement with Lockheed on a restructured contract for LCS-1 and LCS-3, and consequently was terminating construction of LCS-3. On November 1, 2007, the Navy announced that it had not reached an agreement with General Dynamics on a restructured contract for LCS-2 and LCS-4, and consequently was terminating construction of LCS-4. On May 10, 2007, it was reported that the Navy would ask Congress to increase the procurement cost cap for the fifth and sixth LCSs to $460 million each in FY2008 dollars. This report will be updated as events warrant.

3 Contents Introduction...1 Background...2 Littoral Combat Ship (LCS) Program...2 March 2007 Program Restructuring Plan...5 April 2007 Termination of LCS November 2007 Termination of LCS Proposed Common Combat System...9 Potential Oversight Issues for Congress...11 Cost Increase on LCS Sea Frames...11 Cost Cap on Fifth and Sixth Ships...19 Total Program Acquisition Cost...21 Operational Evaluation and Competition for Production...22 Proposed Common Combat System...22 Pace of Mission Package Procurement...23 Mission Packages Funded in OPN Account...23 Options for Congress...24 FY2008 Legislative Activity...25 FY2008 Defense Authorization Bill (H.R. 1585/S. 1547)...25 FY2008 Defense Appropriations Bill (H.R. 3222)...33 List of Tables Table 1. LCS Program Funding in FY2007 Budget...4 Table 2. Projected Procurement Of LCSs...6 Table 3. LCS Sea Frame Unit Procurement Costs...12

4 Navy Littoral Combat Ship (LCS) Program: Background, Oversight Issues, and Options for Congress Introduction The Navy is procuring a new type of surface combatant called the Littoral Combat Ship (LCS). The LCS is a small, fast ship that is to be equipped with modular plug-and-fight mission packages, including unmanned vehicles (UVs). The basic version of the LCS, without any mission packages, is referred to as the LCS sea frame. The first LCS (LCS-1) was procured in FY2005, another three (LCSs 2, 3, and 4) were procured in FY2006, and two more (LCSs 5 and 6) were procured in FY2007. The Navy s proposed FY2008 budget, submitted to Congress in February 2007, requested $910.5 million in procurement funding for three more LCSs. Navy plans call for procuring a total of 55 LCSs. In response to significant cost growth in the building of the first LCSs, the Navy in January 2007 placed a 90-day stop-work order on LCS-3 and in March 2007 announced a proposed plan for restructuring the LCS program that would, among other things, cancel LCSs 5 and 6, use the funding for those two ships to pay for cost overruns on earlier LCSs, and reduce the number of LCSs to be procured in FY2008 from three to two. On April 12, 2007, the Navy announced that it had not reached an agreement with Lockheed on a restructured contract for LCS-1 and LCS-3, and consequently was terminating construction of LCS-3. On November 1, 2007, the Navy announced that it had not reached an agreement with General Dynamics on a restructured contract for LCS-2 and LCS-4, and consequently was terminating construction of LCS-4. On May 10, 2007, it was reported that the Navy would ask Congress to increase the procurement cost cap for the fifth and sixth LCSs to $460 million each in FY2008 dollars. A primary issue for Congress at this point is whether to approve, reject, or modify the Navy s proposed restructuring plan. Congress has several potential options regarding the LCS program.

5 CRS-2 Background Littoral Combat Ship (LCS) Program Announcement of LCS Program. The LCS program was announced on November 1, 2001, when the Navy stated that it was launching a Future Surface Combatant Program aimed at acquiring a family of next-generation surface combatants. This new family of surface combatants, the Navy stated, would include three new classes of ships:! a destroyer called the DD(X) later redesignated the DDG-1000 for the precision long-range strike and naval gunfire mission, 1! a cruiser called the CG(X) for the air defense and ballistic missile mission, 2 and! a smaller combatant called the Littoral Combat Ship (LCS) to counter submarines, small surface attack craft, and mines in heavily contested littoral (near-shore) areas. The LCS In Brief. The LCS is a small, fast surface combatant that is to be equipped with modular plug-and-fight mission packages, including unmanned vehicles (UVs). Rather than being a multimission ship like the Navy s larger surface combatants, the LCS is to be a focused-mission ship equipped to perform one or two missions at any one time. The ship s mission orientation is to be changed by changing out its mission packages. The basic version of the LCS, without any mission packages, is referred to as the LCS sea frame. The LCS s primary intended missions are shallow-water antisubmarine warfare, mine countermeasures, countering small boats, and intelligence, surveillance, and reconnaissance (ISR). Secondary intended missions include homeland defense, maritime interception, and support of special operations forces. The LCS is to displace about 3,000 tons about the size of a corvette or Coast Guard cutter. It is to have a maximum speed of about 45 knots, compared to something more than 30 knots for the Navy s larger surface combatants. The LCS is to have a shallower draft than the Navy s larger surface combatants, permitting it to operate in certain coastal waters and visit certain ports that are not accessible to the Navy s larger surface combatants. The LCS is to employ automation to achieve a reduced core crew of 40 sailors. Up to 35 or so additional sailors are to operate the ship s embarked aircraft and mission packages, making for a total crew of about 75, compared to more than 200 for the Navy s larger surface combatants. 1 For more on the DDG-1000 program, see CRS Report RL32109, Navy DDG-1000 Destroyer Program: Background, Oversight Issues, and Options for Congress, by Ronald O Rourke. 2 For more on the CG(X) program, see CRS Report RL34179, Navy CG(X) Cruiser Program: Background, Oversight Issues, and Options for Congress, by Ronald O Rourke.

6 CRS-3 As mentioned earlier, Navy plans call for procuring a total of 55 LCSs. The Navy currently plans to procure a total of 64 mission packages for the 55 ships. Earlier Navy plans anticipated procuring between 90 and 110 mission packages for a 55-ship fleet. Congressional Action for FY2005-FY2007. In FY2005, Congress approved the Navy s plan to fund the construction of the first two LCSs using research and development funds rather than shipbuilding funds, funded the first LCS s construction cost, required the second LCS to be built to a different design from the first, prohibited the Navy from requesting funds in FY2006 to build a third LCS, and required all LCSs built after the lead ships of each design to be funded in the SCN account rather than the Navy s research and development account. In FY2006, Congress funded the procurement of the second, third, and fourth LCSs. (The Navy requested one LCS for FY2006, consistent with Congress s FY2005 action. Congress funded that ship and provided funding for two additional ships.) Congress in FY2006 also established a $220-million unit procurement cost limit on the fifth and sixth LCSs, plus adjustments for inflation and other factors (Section 124 of the FY2006 defense authorization bill [H.R. 1815/P.L ] of January 6, 2006), required an annual report on LCS mission packages, and made procurement of more than four LCSs contingent on the Navy certifying that there exists a stable design for the LCS. In FY2007, Congress funded the procurement of the fifth and sixth LCSs. Two Industry Teams, Each With Its Own Design. On May 27, 2004, the Navy awarded contracts to two industry teams one led by Lockheed Martin, the other by General Dynamics (GD) to design two versions of the LCS, with options for each team to build up to two LCSs each. The two teams LCS designs are quite different Lockheed s uses a semi-planing steel monohull, while GD s uses an aluminum trimaran hull. The Lockheed team was assigned LCS-1 and LCS-3, while the GD team was assigned LCS-2 and LCS-4. Lockheed plans to build its LCSs at Marinette Marine of Marinette, WI, and Bollinger Shipyards of Lockport, LA. (LCS- 1 being built by Marinette and LCS-3 was scheduled to have been built by Bollinger.) GD plans to build its LCSs at the Austal USA shipyard of Mobile, AL. 3 Program Funding. Table 1 shows LCS funding through FY2011 as reflected in the FY2007 budget submitted to Congress in February CRS in February 2007 requested updated (FY2008-FY2013) budget information from the Navy, but the Navy Office of Legislative Affairs informed CRS by telephone on March 28, 2007, that in light of the Navy s proposed plan for restructuring the LCS program, updated FY2008-FY2013 funding figures were not available. 3 Austal USA was created in 1999 as a joint venture between Austal Limited of Henderson, Western Australia and Bender Shipbuilding & Repair Company of Mobile, AL. The Lockheed LCS team also includes GD/BIW as prime contractor to provide program management and planning, provide technical management, and to serve as LCS system production lead.

7 CRS-4 With Congress s permission, the Navy procured the first and second LCSs through the Navy s research and development account. Subsequent LCSs are being procured through the Navy s ship-procurement account, called the Shipbuilding and Conversion, Navy (SCN) account. The Navy is procuring LCS mission packages through the Other Procurement, Navy (OPN) account. Table 1. LCS Program Funding in FY2007 Budget (Funding as shown in FY2007 budget submitted to Congress in February 2006; millions of then-year dollars; totals may not add due to rounding) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Total thru FY11 Research, Development, Test & Evaluation, Navy (RDT&EN) account Ship 1 construction (qty) (1) Ship 2 construction (qty) (1) Ships 1and 2 outfitting/post delivery LCS ship development LCS mission package project (qty) (3) (1) (4) Subtotal RDT&EN Shipbuilding and Conversion, Navy (SCN) account Ships construction (2) (2) (3) (6) (6) (6) (25) (qty) Outfitting & post delivery Subtotal SCN Other Procurement, Navy (OPN) account (for LCS mission packages) Subtotal OPN (qty) (0) 79.1 (1) (3) (13) (12) (15) (44) Weapons Procurement, Navy (WPN) account Subtotal WPN TOTAL Source: Navy Office of Legislative Affairs (NOLA), March 6 and April 17, 2006, based on figures from FY2007 budget submitted to Congress in February CRS in February 2007 requested updated (FY2008) budget information from the Navy, but NOLA informed CRS by telephone on March 28, 2007, that in light of the Navy s proposed plan for restructuring the LCS program, updated FY2008 funding figures are not available. Potential Total Acquisition Cost. The Navy has not provided an estimated total acquisition (i.e., development plus procurement) cost for the LCS program. CRS estimates that the LCS program (including mission packages) might have a total acquisition cost of roughly $23.8 billion to $29.6 billion. This estimate includes $2.5 billion in research and development costs (including the construction of first two sea frames and the procurement of the first four mission packages), procurement of 53

8 CRS-5 additional sea frames at a cost of $350 million to $460 million each, 4 and 64 mission packages procured at an average cost of about $42.3 million each Year Procurement Profile. Table 2 shows projected procurement of LCSs as shown in a Navy 30-year shipbuilding plan submitted to Congress in February This plan does not take into account the Navy s proposal to cancel LCSs 5 and 6, its decision to terminate construction of LCS-3, and its proposal to reduce planned procurement of LCSs to two ships in FY2008 and three ships in FY2009. March 2007 Program Restructuring Plan In response to significant cost growth in the building of the first LCSs that first came to light in January 2007, the Navy in March 2007 announced a proposed plan for restructuring the LCS program. The Navy s proposed restructuring would:! cancel the two LCSs funded in FY2007 (LCSs 5 and 6) and use the funding to pay for cost overruns on earlier LCSs;! lift the 90-day stop-work order that the Navy placed on LCS-3 in January 2007 provided that the Navy reached an agreement by April 12 with the Lockheed-led industry team building LCS-3 to restructure the contract that the Lockheed team has for building LCSs 1 and 3 from a cost-plus type contract into a fixed price incentive (FPI)-type contract;! alternatively, terminate construction of LCS-3 if an agreement on a restructured contract for LCS-1 and LCS-3 could not be reached with the Lockheed team by April 12;! seek to restructure the contract for building LCSs 2 and 4 (which are being built by a second industry team led by General Dynamics) into an FPI-type contract if LCSs 2 and 4 experience cost growth comparable to that of LCSs 1 and 3 and, if such a restructuring were sought, terminate construction of LCS-4 if an agreement on a restructured contract for LCS-2 and LCS-4 could not be reached; 4 The figure of $350 million is based on Navy statements in early 2007 that LCS-1 might cost $350 million to $375 million; the figure of $460 million is based on the Navy s request to have Congress amend the procurement cost cap on the fifth and sixth LCSs to $460 million per ship. 5 The Navy reportedly wants to procure 24 mine warfare mission packages at an average cost of $68 million each, 16 antisubmarine warfare packages at an average cost of $42.3 million each, and 24 surface warfare packages at an average cost of $16.7 million each. (Emelie Rutherford, Littoral Combat Ship Mission Packages Range In Costs, Features, Inside the Navy, September 3, 2007; for similar figures, see Christopher P. Cavas, First LCS Mission Package Ready For Delivery, DefenseNews.com, August 29, 2007.)

9 CRS-6 Table 2. Projected Procurement Of LCSs FY LCS a Source: U.S. Department of the Navy, Report to Congress on Annual Long-Range Plan for Construction of Naval Vessels for FY 2008, February Table 3 on page 6. a. Plus one LCS procured in FY2005, three more in FY2006, and two more in FY2007.! reduce the number of LCSs requested for FY2008 from three to two (for the same requested FY2008 procurement funding of $910.5 million), and the number to be requested for FY2009 from six to three;! conduct an operational evaluation to select a favored design for the LCS to be procured in FY2010 and subsequent years; and

10 CRS-7! conduct a full and open competition among bidders for the right to build that design. 6 Although the Navy intends to conduct an operational evaluation to support the selection of a single LCS design to be procured in FY2010 and beyond, the Navy also stated in an August 2007 report to Congress on the LCS program that the Navy may elect to continue production of both seaframes should each design present a unique operational advantage. The Navy carefully considered the two primary alternatives for LCS seaframe acquisition in FY 2010 and beyond; (1) selecting a single seaframe design and (2) continuing to procure two seaframe designs. Selecting a single Flight 1 design [i.e., a design to be procured in FY2010 and beyond] achieves commonality in hull, mechanical, and electrical (HM&E) and C4I systems in the LCS class. This alternative also allows the Navy to move more easily to a common combat system and C4I suite 7 for the class. One seaframe design with a common combat system and C4I suite is projected to reduce life cycle cost with reduced logistics and training costs. To maintain competitive pricing pressure for Flight 1, the Navy intends to conduct a full and open competition for procurement in FY 2010 and beyond. This may result in some additional non-recurring start up costs in the near-term, but expanding potential sources increases competitive pricing pressure and enables higher production rates in the outyears needed to procure a 55-ship LCS class and achieve the CNO s [the Chief of Naval Operation s] force structure objective of [a total Navy fleet] of 313 ships. Continued procurement of two seaframe designs into FY2010 and beyond is also an alternative since both ships are currently assessed as being capable of meeting all the Key Performance Parameter and critical requirements. Existing Navy and industry nonrecurring investments would be leveraged to the maximum extent under continuation of Flight 0 ship [i.e., ships procured prior to FY2010] production with the current primes [prime contractors]. Additionally, the common combat system and C4I suite would be included in the alternative. The Navy s decision to move to Flight I procurement in FY 2010 allows these ships to more easily incorporate lessons learned from the operational evaluation. The implementation of a common combat system and C4I suite as part of Flight 1 would reduce lifecycle cost of the common warfare system, but does not achieve the savings in seaframe HM&E [hull, mechanical, and electrical systems], crew training, and logistics costs anticipated from selecting a single seaframe design. 8 6 Source: Navy briefing to CRS and Congressional Budget Office (CBO) on Navy s proposed LCS program restructuring plan, March 21, C4I stands for command, control, communications, computers, and intelligence. 8 Report to Congress, Littoral Combat Ship, Prepared by Deputy Assistant Secretary of the Navy, Ships, Washington, DC 20350, August 2007, p. 7. See also p. 3.

11 CRS-8 April 2007 Termination of LCS-3 On April 12, 2007, the Navy announced that it had not reached an agreement with Lockheed on a restructured contract for LCS-1 and LCS-3, and consequently was terminating construction of LCS-3. (The Navy subsequently began referring to the ship as having been partially terminated a reference to the fact that Lockheed was allowed to continue procuring certain components for LCS-3, so that a complete set of these components would be on hand to be incorporated into the next LCS built to the Lockheed design.) The Defense Department s April 12, 2007, announcement of the termination decision stated: Secretary of the Navy Donald C. Winter announced today that the Department of the Navy is terminating construction of the third Littoral Combat Ship (LCS 3) for convenience under the Termination clause of the contract because the Navy and Lockheed Martin could not reach agreement on the terms of a modified contract. The Navy issued a stop-work order on construction on LCS 3 in January following a series of cost overruns on LCS 1 and projection of cost increases on LCS 3, which are being built by Lockheed Martin under a cost-plus contract. The Navy announced in March that it would consider lifting the stop-work order on LCS 3 if the Navy and Lockheed Martin could agree on the terms for a fixed price incentive agreement by mid-april. The Navy worked closely with Lockheed Martin to try to restructure the agreement for LCS 3 to more equitably balance cost and risk, but could not come to terms and conditions that were acceptable to both parties. The Navy remains committed to completing construction on LCS 1 under the current contract with Lockheed Martin. LCS 2 and 4 are under contract with General Dynamics, and the Navy will monitor their cost performance closely. The Navy intends to continue with the plan to assess costs and capabilities of LCS 1 and LCS 2 and transition to a single seaframe configuration in fiscal year 10 after an operational assessment and considering all relevant factors. General Dynamics ships will continue on a cost-plus basis as long as its costs remain defined and manageable. If the cost performance becomes unacceptable, then General Dynamics will be subject to similar restructuring requirements. LCS continues to be a critical warfighting requirement for our Navy to maintain dominance in the littorals and strategic choke points around the world, said Winter. While this is a difficult decision, we recognize that active oversight and strict cost controls in the early years are necessary to ensuring we can deliver these ships to the fleet over the long term. 9 November 2007 Termination of LCS-4 In late-september 2007, it was reported that the Navy on September 19 had sent a letter to General Dynamics to initiate negotiations on restructuring the contract for building LCSs 2 and 4 into an FPI-type contract. The negotiations reportedly were 9 Department of Defense News Release No , April 12, 2007, Navy Terminates Littoral Combat Ship 3.

12 CRS-9 to be completed by October 19, days from September On November 1, 2007, the Navy announced that it had not reached an agreement with General Dynamics on a restructured contract for LCS-2 and LCS-4, and consequently was terminating construction of LCS-4. The Defense Department s November 1, 2007, announcement of the termination decision stated: Secretary of the Navy Donald C. Winter and Chief of Naval Operations Adm. Gary Roughead announced today that the Department of the Navy is terminating construction of the fourth littoral combat ship (LCS 4) for convenience under the termination clause of the contract because the Navy and General Dynamics could not reach agreement on the terms of a modified contract. The Navy had not yet authorized construction on LCS 4, following a series of cost overruns on LCS 2. The Navy intended to begin construction of LCS 4 if the Navy and General Dynamics could agree on the terms for a fixed-price incentive agreement. The Navy worked closely with General Dynamics to try to restructure the agreement for LCS 4 to more equitably balance cost and risk, but could not come to terms and conditions that were acceptable to both parties. The Navy remains committed to the LCS program. LCS continues to be a critical warfighting requirement for our Navy to maintain dominance in the littorals and strategic choke points around the world, said Winter. While this is a difficult decision, we recognize that active oversight and strict cost controls in the early years are necessary to ensuring we can deliver these ships to the fleet over the long term. I am absolutely committed to the Littoral Combat Ship, said Roughead. We need this ship. It is very important that our acquisition efforts produce the right littoral combat ship capability to the fleet at the right cost. 11 Proposed Common Combat System The two LCS designs currently use two different, contractor-furnished combat systems. 12 As an added element of its restructuring of the LCS program, the Navy is proposing to shift to a common, government-furnished combat system for LCSs procured in FY2010 and beyond. The Navy testified in July 2007 that: 10 Geoff Fein, Navy Seeking To Negotiate FPI Contract With General Dynamics, Defense Daily, September 24, 2007; Geoff Fein, Navy, General Dynamics Meet To Discuss New LCS Fixed Price Structure, Defense Daily, September 27, 2007; Tony Capaccio, General Dynamics Urged To Take Fixed Price On Warship Contract, Bloomberg News, September 28, 2007; Jason Sherman, Navy, General Dynamics Discuss Fixed-Price Contract For LCS, Inside the Navy, October 1, Department of Defense News Release No , November 1, 2007, Navy Terminates Littoral Combat Ship (LCS 4) Contract. 12 A ship s combat system typically includes its sensors, computers, displays, and weapon launchers. The discussion here refers to the part of the LCS combat system that is permanently built into each sea frame, and not to the part that would be added by a modular mission package.

13 CRS-10 The LCS Flight 0 ships [i.e., the LCSs procured prior to FY2010] acquisition strategy allowed the industry teams to design and acquire the combat system/c4i suite. As a result, each team developed a combat system whose components varied greatly from those found in other Navy combat systems as well as being significantly different from each other. The lack of commonality between the two current designs and Navy components negatively impacts the expected combat systems ownership costs to support these ship variants: i.e., materiel logistics, training programs, maintenance, system upgrades and technology refreshment. Additionally, some system components are foreign and/or proprietary designs that may not convey with Government Purpose Rights, limiting sources for obtaining component support. To minimize impacts to the combat systems ownership costs to acquire, operate, and maintain the LCS 1 Class, the Navy is amending its acquisition strategy for acquiring the LCS combat system beginning with FY 2010 Flight 1 procurements [i.e., LCS procured starting in FY2010]. The Navy intends to transition from Contractor Furnished Equipment (CFE) designs to a single common combat system that will be provided as Government Furnished Equipment (GFE)/Government Furnished Information (GFI). This strategy will incorporate, wherever possible, existing Navy programs of record combat system components. Where no Navy program of record or fleet-common component exists that meet LCS requirements, a full and open competition will be conducted. This strategy allows the Navy to establish commonality of LCS combat system components across all Flight 1 ships in the class, preserve Government Purpose Rights for the Navy, and assure that required capabilities are met with a set of combat system components that optimizes performance, acquisition and ownership costs. The current Flight 0 combat system solutions consist of eight major elements: an open architecture combat management system, volume search radar, identification friend or foe system, electronic surveillance system, medium caliber gun, gun fire control system, electro-optical/infrared sighting system, and a close-in/self-defense weapon system. The common combat system that the Navy will provide as GFE/GFI is comprised of these same elements. The Navy is not developing a new LCS combat system or adding elements to the current solution configuration. Rather, for Flight 1 the Navy is replacing the two unique sets of Flight 0 combat system components with a single set of combat system components. During the FY timeframe, ship design changes from the common combat system/c4i suite, lessons learned from LCS Flight 0 production, developmental/operational testing and at-sea testing will be incorporated into a Government-furnished design package. The Government-furnished design package provides the technical baseline for FY 2010 Flight 1 full and open competitive solicitation and subsequent Flight 1 ship production contract awards Statement of VADM Paul Sullivan, et al, Before the Subcommittee on Seapower and Expeditionary Forces of the House Armed Services Committee on Surface Combatant Construction Update, July 24, 2007, p. 8.

14 CRS-11 The Navy is proposing to begin work on the common combat system in FY2007 using some of the prior-year LCS program funding that the Navy has requested Congress to reprogram. Potential Oversight Issues for Congress Cost Increase on LCS Sea Frames The Navy originally spoke of building LCS sea frames for about $220 million each, but estimated procurement costs for LCS sea frames have risen substantially above that figure. Cost growth in building the first LCS sea frames is the primary issue underpinning the Navy s proposed plan for restructuring the LCS program and the Navy s decision to terminate construction of LCS-3. The cost growth issue was the focus of an oversight hearing held before the Seapower and Expeditionary Forces subcommittee of the House Armed Services Committee on February 8, 2007, and was also a focus of an additional hearing on Navy surface combatant programs held before the same subcommittee on July 24, Estimated LCS sea frame unit procurement costs have increased twice in early 2006, and again in The discussion below summarizes both increases. Increase Reported in Early The proposed FY2007 Navy budget submitted to Congress in February 2006 showed that LCS sea frame procurement costs had grown substantially from figures in the FY2006 budget submitted a year earlier. The estimate for the first LCS increased from $212.5 million in the FY2006 budget to $274.5 million in the FY2007 budget, an increase of about 29%. The estimate for the second LCS increased from $256.5 million to $278.1 million, an increase of about 8%. As shown in Table 3, the estimate for follow-on ships to be procured in FY2009-FY2011, when the LCS program is to reach its maximum annual procurement rate of six ships per year, increased from $223.3 million to $298 million, an increase of about 33%. The Navy stated in early 2006 that the cost increase from the FY2006 budget to the FY2007 budget was due mostly to the fact that LCS procurement costs in the FY2006 budget did not include items that are traditionally included in the so-called end cost the total budgeted procurement cost of a Navy shipbuilding program, such as Navy program-management costs, an allowance for changes, and escalation (inflation). The absence of these costs from the FY2006 LCS budget submission raised potential oversight issues for Congress, including the following:! Why were these costs excluded? Was this a budget-preparation oversight? If so, how could such an oversight occur, given the many people involved in Navy budget preparation and review, and why did it occur on the LCS program but not other programs? Was anyone held accountable for this oversight, and if so, how? If this was not an oversight, then what was the reason?

15 CRS-12 Table 3. LCS Sea Frame Unit Procurement Costs (costs in millions of then-year dollars) FY07 FY08 FY09 FY10 FY11 FY09- FY11 FY2006 budget submission Procurement cost , , , ,349.8 Number of ships Unit procurement cost FY2007 budget submission Procurement cost , , , ,363.9 Number of ships Unit procurement cost % change in unit procurement cost, FY07 compared to FY06 (4%) 21% 30% 33% 37% 33% Source: Prepared by CRS using Navy data from FY2006 and FY2007 Navy budget submissions.! Did the Navy believe there was no substantial risk of penalty for submitting to Congress a budget presentation for a shipbuilding program that, for whatever reason, significantly underestimated procurement costs?! Do LCS procurement costs in the budget now include all costs that, under traditional budgeting practices, should be included? If not, what other costs are still unacknowledged?! Have personnel or other resources from other Navy programs been used for the LCS program in any way? If so, have the costs of these personnel or other resources been fully charged to the LCS program and fully reflected in LCS program costs shown in the budget? Further Increase Reported in On January 11, 2007, the Navy reported that LCS-1 was experiencing considerable cost overruns. The Navy subsequently stated that the estimated shipyard construction cost of LCS-1 is $350 million to $375 million. This suggested that the end cost of LCS-1 the ship s total budgeted procurement cost, which also includes costs for things such as Navy program-management costs and an allowance for changes could be in excess of $400 million. The Navy has not publicly provided precise cost overrun figures for LCSs 2 and 4, but the Navy has stated that the cost overrun on LCSs 1 and 2 is somewhere between 50% and 75%, depending on the baseline that is used to measure the overrun. As discussed in the section below on the LCS procurement cost cap, it was reported on May 10, 2007, that the Navy would ask Congress to increase the procurement cost cap for the fifth and sixth LCSs to $460 million each in FY2008

16 CRS-13 dollars. This figure is roughly 53% higher than the approximate figure of roughly $300 million for follow-on LCSs in the FY2007 budget, as shown in Table 3. CBO July 2007 Estimate. At the July 24, 2007, hearing on Navy surface combatant programs, the Congressional Budget Office (CBO) presented its own estimates of potential LCS procurement costs: Several months ago, press reports indicated that the cost could well exceed $400 million each for the first two LCS sea frames. Recently, the Navy requested that the cost cap for the fifth and sixth sea frames be raised to $460 million, which suggests that the Navy s estimate of the acquisition cost for the first two LCSs would be around $600 million apiece... As of this writing, the Navy has not publicly released an estimate for the LCS program that incorporates the most recent cost growth, other than its request to raise the cost caps for the fifth and sixth ships. CBO estimates that with that growth included, the first two LCSs would cost about $630 million each, excluding mission modules but including outfitting, postdelivery, and various nonrecurring costs associated with the first ships of the class. As the program advances, with a settled design and higher annual rates of production, the average cost per ship is likely to decline. Excluding mission modules, the 55 LCSs in the Navy s plan would cost an average of $450 million each, CBO estimates. 14 Lockheed Perspective on Cost Growth 15. Lockheed said in February 2007 that cost growth on LCS-1 was due primarily to three factors:! manufacturing issues that are typically discovered in the construction of a lead ship of a class;! problems with vendors supplying components and materials for the ship; and! changes in ship-construction standards directed by the Navy. A major vendor issue, Lockheed said, were the ship s reduction gears, which link the ship s gas-turbine engines to its waterjets (i.e., its propellers). Due to a faulty tool at the manufacturer (General Electric), the gears were manufactured incorrectly, causing a 27-week delay in delivery that forced a major resequencing of construction work on LCS Statement of J. Michael Gilmore, Assistant Director for National Security, and Eric J. Labs, Senior Analyst, [on] The Navy s 2008 Shipbuilding Plan and Key Ship Programs, before the Subcommittee on Seapower and Expeditionary Forces Committee on Armed Services U.S. House of Representatives, July 24, 2007, p This section is based on a Lockheed briefing on the status of the LCS program presented to CRS on February 1, 2007.

17 CRS-14 A second vendor issue concerned HSLA-80, a kind of steel used to build the bottom half of the ship s hull. 16 The same kind of steel is in demand for up-armoring U.S. Army and Marine Corps Humvees used in Iraq, leading to delays in obtaining it for the LCS program. The issue of ship-construction standards involves building the LCS to a standard called Naval Vessel Rules (NVR). Lockheed said it submitted its LCS bid in January 2004, using a combination of the high-speed naval craft (HSNC) rules issued by the American Bureau of Shipping (ABS) and a draft version of the NVR that the Navy had issued. The LCS design in the January 2004 bid, Lockheed said, was the design accepted by the Navy. The final version of the NVR, Lockheed said, was issued by the Navy in May 2004 and was much more extensive than the draft version. The final version, Lockheed said, impacted 75% of the completed design products for LCS-1, resulted in about 25% additional drawings, and required the ship to include more rugged construction and more capable components in various places. Lockheed believes that the lead-ship manufacturing issues and the faulty manufacturing of the reduction gears will not recur on follow-on Lockheed-built LCSs, but that the NVR issue will increase the cost of follow-on Lockheed-built LCSs. Lockheed said it took several actions in response to the situation concerning LCS-1, including:! co-locating Lockheed management and the LCS s naval architects (from the naval architectural firm of Gibbs & Cox) at the shipyard;! increasing the number of Lockheed personnel at the shipyard through the addition of production managers with Navy shipbuilding experience;! instituting process improvements at the shipyard;! establishing new metrics for measuring performance on work packages at the shipyard;! integrating the American Bureau of Shipping and the on-scene Navy supervisor of shipbuilding (SUPSHIP) into daily production meetings;! strengthening the earned-value management system (EMVS) and financial-management processes for the program; and! replacing senior management at the shipyard. Lockheed reportedly warned the Navy about increasing costs on LCS-1 on multiple occasions since March 2006 a month after the FY2007 budget was submitted to Congress. 16 HSLA means high-strength, low-alloy, and 80 is a measurement of the strength of the steel.

18 CRS-15 it Navy Perspective on Cost Growth 17. The Navy testified in July 2007 that established a Program Management Assist Group (PMAG) to conduct a review of cost growth associated with LCS 1, and to review projected costs for LCS 2, LCS 3 and LCS 4. The PMAG assessment was completed, and identified the following root causes of cost growth: Aggressive cost goal and schedule Pressure to build to schedule was strongly emphasized and generated cost growth. The ambitious schedule relied upon concurrent design and construction that was not achieved. For LCS 1, the timing of LM s bid to the finalization of Naval Vessel Rules resulted in underestimated efforts for design and construction by the contractor. The competitive environment created disincentive for the contractor to surface execution challenges to the Navy. The PMAG made several recommendations based on the assessment of LCS root causes: Emphasize rigorous risk management for high risk programs, including incorporation of risk mitigation strategies directly into shipbuilding contracts. ASN(RD&A) 18 issue guidance highlighting critical program management functions and emphasizing chain of command notification of unexpected results, including details surrounding changes in contract baselines. Conduct formal independent cost estimates before exercising future options or contracts in LCS. Incorporate appropriate risk margins in budgets for future LCS procurements. Implement organizational changes across supporting offices: improving timing and staffing levels of on-site government oversight (Supervisor of Shipbuilding, SUPSHIP) to better match construction schedules; providing adequate resources and manning to the acquisition program office and supporting NAVSEA 19 offices; and improving experience and training levels of the program managers and their staffs. Implement contractual and acquisition policy changes to improve visibility and performance expectations. Responses to these recommendations will be addressed in the following discussion of the revised LCS program plan, and in a later overview of changes being made to prevent reoccurrence of LCS lessons across all Navy acquisition programs This section is based in part on a Navy briefing on the status of the LCS program presented to CRS on February 5, The Assistant Secretary of the Navy (Research, Development, and Acquisition) the Navy s acquisition executive. 19 Naval Sea Systems Command the branch of the Navy with lead responsibility for acquisition of ships. 20 Statement of VADM Paul Sullivan, et al, Before the Subcommittee on Seapower and (continued...)

19 CRS-16 GAO Perspective on Cost Growth. GAO testified in July 2007 that according to its own analysis of Navy data, the combined cost of LCSs 1 and 2 had increased from $472 million to $1,075 an increase of 128%. 21 GAO testified that: We have frequently reported on the wisdom of using a solid, executable business case before committing resources to a new product development effort... A sound business case would establish and resource a knowledge-based approach at the outset of a program. We would define such a business case as firm requirements, mature technologies, and an acquisition strategy that provides sufficient time and money for design activities before construction start. The business case is the essential first step in any acquisition program that sets the stage for the remaining stages of a program, namely the business or contracting arrangements and actual execution or performance. If the business case is not sound, the contract will not correct the problem and execution will be subpar. This does not mean that all potential problems can be eliminated and perfection achieved, but rather that sound business cases can get the Navy better shipbuilding outcomes and better return on investment. If any one element of the business case is weak, problems can be expected in construction. The need to meet schedule is one of the main reasons why programs cannot execute their business cases. This pattern was clearly evident in both the LPD 17 [amphibious ship] and LCS programs. In both cases, the program pushed ahead with production even when design problems arose or key equipment was not available when needed. Short cuts, such as doing technology development concurrently with design and construction, are taken to meet schedule. In the end, problems occur that cannot be resolved within compressed, optimistic schedules. Ultimately, when a schedule is set that cannot accommodate program scope, delivering an initial capability is delayed and higher costs are incurred... What happens when the elements of a solid business case are not present? Unfortunately, the results have been all too visible in the LPD 17 and the LCS. Ship construction in these programs has been hampered throughout by design instability and program management challenges that can be traced back to flawed business cases. The Navy moved forward with ambitious schedules for constructing LPD 17 and LCS despite significant challenges in stabilizing the designs for these ships. As a result, construction work has been performed out of sequence and significant rework has been required, disrupting the optimal construction sequence and application of lessons learned for follow-on vessels in these programs... In the LCS program, design instability resulted from a flawed business case as well as changes to Navy requirements. From the outset, the Navy sought to 20 (...continued) Expeditionary Forces of the House Armed Services Committee on Surface Combatant Construction Update, July 24, 2007, pp Defense Acquisitions[:] Realistic Business Cases Needed to Execute Navy Shipbuilding Programs, Statement of Paul L. Francis, Director, Acquisition and Sourcing Management Team, Testimony Before the Subcommittee on Seapower and Expeditionary Forces, Committee on Armed Services, House of Representatives, July 24, 2007 (GAO T), pp. 4 and 22.

20 CRS-17 concurrently design and construct two lead ships in the LCS program in an effort to rapidly meet pressing needs in the mine countermeasures, antisubmarine warfare, and surface warfare mission areas. The Navy believed it could manage this approach, even with little margin for error, because it considered each LCS to be an adaptation of an existing high-speed ferry design. It has since been realized that transforming a high-speed ferry into a capable, networked, survivable warship was quite a complex venture. Implementation of new Naval Vessel Rules (design guidelines) further complicated the Navy s concurrent design-build strategy for LCS. These rules required program officials to redesign major elements of each LCS design to meet enhanced survivability requirements, even after construction had begun on the first ship. While these requirements changes improved the robustness of LCS designs, they contributed to out of sequence work and rework on the lead ships. The Navy failed to fully account for these changes when establishing its $220 million cost target and 2-year construction cycle for the lead ships. Complicating LCS construction was a compressed and aggressive schedule. When design standards were clarified with the issuance of Naval Vessel Rules and major equipment deliveries were delayed (e.g., main reduction gears), adjustments to the schedule were not made. Instead, with the first LCS, the Navy and shipbuilder continued to focus on achieving the planned schedule, accepting the higher costs associated with out of sequence work and rework. This approach enabled the Navy to achieve its planned launch date for the first Littoral Combat Ship, but required it to sacrifice its desired level of outfitting. Program officials report that schedule pressures also drove low outfitting levels on the second Littoral Combat Ship design as well, although rework requirements have been less intensive to date. However, because remaining work on the first two ships will now have to be completed out-of-sequence, the initial schedule gains most likely will be offset by increased labor hours to finish these ships. The difficulties and costs discussed above relate to the LCS seaframe only. This program is unique in that the ship s mission equipment is being developed and funded separately from the seaframe. The Navy faces additional challenges integrating mission packages with the ships, which could further increase costs and delay delivery of new antisubmarine warfare, mine countermeasures, and surface warfare capabilities to the fleet. These mission packages are required to meet a weight requirement of 180 metric tons or less and require 35 personnel or less to operate them.c However, the Navy estimates that the mine countermeasures mission package may require an additional 13 metric tons of weight and 7 more operator personnel in order to deploy the full level of promised capability. Because neither of the competing ship designs can accommodate these increases, the Navy may be forced to reevaluate its planned capabilities for LCS. 22 Potential Oversight Issues. Potential oversight issues raised by the reported further increase in LCS sea frame unit procurement costs include the following:! When did various Navy leaders first learn of the cost increase on LCS-1? Why did the Navy wait until January 2007 to publicly reveal the cost increase? Lockheed testified at the February 8, 2007 hearing 22 Ibid, pp

21 CRS-18 that it sends monthly reports with LCS cost information to the Navy. In which of these monthly reports did Lockheed first attempt to alert the Navy regarding the potential for significant cost growth on LCS- 1?! When will the Navy announce its estimates of the cost overrun on LCSs 2?! How much of the cost increases on LCSs 1 and 2 are attributable to prime contractor performance? To performance by supplier firms? To Navy actions in managing the program?! Concurrency in design and construction has long been known as a source of risk in shipbuilding and other weapon-acquisition programs. Eliminating concurrency forms part of DOD s effort to move toward best practices in acquisition. In retrospect, did the Navy make a good decision in letting its sense of urgency about the LCS override the known risks of concurrency in design and construction?! When will the Navy have a sense of whether corrective actions taken by the Navy and industry in response to the cost growth are succeeding in controlling LCS construction costs?! Do the estimated costs of LCSs 1 and 2 reflect systems, components, or materials provided by vendors at reduced prices as part of an effort by those vendors to secure a role in the 55-ship LCS program? If so, how much more expensive might these systems, components, or materials become on later LCSs? Is this a source of concern regarding the potential for cost growth on follow-on LCSs?! In light of cost growth LCSs, where does the LCS program now stand in relation to the Nunn-McCurdy provision (10 U.S.C. 2433), which requires certain actions to be taken if the cost of a defense acquisition program rises above certain thresholds?! How might the increase in LCS unit procurement costs affect the number of LCSs that the Navy can afford to procure each year, and the total number it can afford to procure over the long run?! Is the Navy planning to finance cost growth on LCS sea frames by reducing funding for the procurement of LCS mission packages? For example, is cost growth on LCS sea frames linked in some way to the reduction in the planned number of LCS mission packages from the earlier figure of 90 to 110 to the current figure of 64? If the Navy is financing cost growth on LCS sea frames by reducing funding for the procurement of LCS mission packages, how might this reduce the capabilities of the planned 55-ship LCS fleet?